The potential bright spots with RadioShack

NEW YORK (MarketWatch) — Not for the faint of the heart, but electronics retailer RadioShack Corp., after having lost more than four-fifths of its value in the past year, could have promises for investors, an analyst said.

Best Buy Co.
BBY, +0.53%
, RadioShack’s larger rival, dipped 0.8%. Its stock has lost 24% of its value this year as the brick-and-mortar retailers combat increased competition from online retailers led by Amazon.com Inc.
AMZN, -0.11%
and consumers use their mobile phone devices to comparison shop while in stores in so-called “showrooming” effect.

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After having recently ousted its former Chief Executive James Gooch; having its stock removed from the S&P mid-market index; and suspending its dividends, buybacks and financial forecast, RadioShack saw its stock price had all but reflected most of the downside risks, Chai said.

“With the market cap equivalent to just 20% of inventory and (accounts receivables), over $1 billion of liquidity and potential for new leadership to take action, we see opportunities for upside,” she said.

While the analyst said the next major news from the company will likely be the release of another difficult quarter later in October, she believes that was already well communicated to Wall Street and also priced to the stock.

Among the potential bright spots, Chai said RadioShack, which has 4,400 company-owned U.S. stores, could free up $115,000 in cash from each closing of an under-performing store.

It “has over 1,000 leases coming up for renewal every year, giving it an enviable opportunity to downsize its footprint,” she said, adding the company’s leases are usually only three years long. “Store closures could have a very material impact on reducing staff costs and margins.”

The company could also narrow its loss by exiting its partnership with Target Corp., which allows RadioShack to operate Target Mobile kiosks inside the discounter’s stores, the analyst noted.

The Target business hasn’t been able to replace the company’s prior deal to operate mobile kiosks at Wal-Mart Stores Inc.’s
WMT, -0.25%
Sam’s Club because of a more limited selling space and RadioShack’s only selling postpaid phones and a limited number of cases and warranties, the analyst said, adding RadioShack’s Target
TGT, -0.10%
business lost $17 million more than in 2010.

Even if the two parties choose not to end the contract, Chai said she thinks they will work together to make the business more profitable for RadioShack. For example, she said Target’s weekend circulars now feature the mobile kiosks, and RadioShack is also increasing employee training and scheduling the staff better to improve that business.

The analyst also noted RadioShack’s gross margin decline, which dropped from 46% in 2009 to 38.5% in the first half of this year, has largely reached its peak. RadioShack’s margin has been hurt by its increased focus on mobile business, as well as increased sales of less profitable smartphones such as iPhone, the analyst said. In comparison, its traditional business of selling power products, headphones and mobile accessories yields more profit.

“Looking at the factors which drove this margin decline, we think most of the damage has been done and believe margins could begin to stabilize in“ the fourth quarter, she said.

The analyst said concerns about the company’s liquidity also have been “overblown,” as its over $1 billion in liquidity appears to be “sufficient for now” versus $375 million in debt due August.

“Our positive view on (RadioShack) is predicated on the view that a new management team with vision and commitment comes on board and has the ability to return the company to operating profitability by shedding stores,” she said. “Having an effective CEO in place by April 2013 is critical. If the seat is still vacant by then, we think the story will start to take a more negative turn.”

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